CCCIS Comply

CIS guide

CIS payments & deductions: how to get them right

Once a subcontractor is verified, every payment you make has to be split between materials and labour, the right CIS rate applied, a payment & deduction statement issued, and the tax paid over to HMRC. Here's how the calculation works, with a worked example.

CIS Comply is a record-keeping tool. It does not file returns with HMRC or replace professional accountancy advice. Always verify subcontractors directly with HMRC and consult a qualified accountant.

The basic calculation

CIS is only ever deducted from the labour element of an invoice — never from materials, plant hire, fuel for plant, or VAT. The formula is:

Labour = Gross invoice − Materials − VAT CIS deduction = Labour × (0%, 20% or 30%) Net paid to subcontractor = Gross − VAT-exclusive deduction

Worked example: a 20% subcontractor

A verified subcontractor invoices £2,400 + VAT, of which £600 is materials.

  • Gross (ex-VAT): £2,400
  • Materials: £600
  • Labour element: £2,400 − £600 = £1,800
  • CIS deduction (20%): £1,800 × 0.20 = £360
  • Net to subcontractor: £2,400 − £360 + VAT = £2,040 + VAT
  • Paid to HMRC with next CIS/PAYE payment: £360

If the same subcontractor were unverified (30% rate), the deduction would be £540 and the net would drop to £1,860 + VAT — a £180 cashflow hit caused entirely by missing the verification step.

The three rates in practice

  • 0% (gross status) — pay the full invoice, no deduction. The subcontractor settles their own tax.
  • 20% (standard) — the default for verified, CIS-registered subcontractors.
  • 30% (higher) — applied automatically when a subcontractor can't be verified. Often a sign of a name/UTR mismatch — worth a phone call before paying.

The Payment and Deduction Statement (PDS)

Within 14 days of the end of each tax month (i.e. by the 19th), you have to send each subcontractor a written statement showing:

  • Your name and your Employer Reference
  • The subcontractor's name, UTR and verification reference
  • The tax month covered
  • Gross amount paid, materials cost, and labour element
  • CIS tax deducted

The PDS is what the subcontractor uses to reclaim the CIS tax on their own Self Assessment or, if they are a limited company, against their PAYE/CIS liabilities. Not issuing PDS statements is one of the compliance failures HMRC penalises most consistently.

Paying CIS deductions to HMRC

CIS deductions are paid to HMRC alongside PAYE — by the 22nd of the month if paying electronically (19th if paying by post), covering the tax month that ended on the 5th. They are reported on the Employer Payment Summary (EPS), not on the CIS300 monthly return itself.

Keep an audit trail of every payment

HMRC's first request in a CIS audit is almost always the same: show me the payment & deduction statements for the last 12 months and prove the deductions tie back to the verifications. A simple payment log that records gross, materials, labour, rate, deduction and net for every payment — alongside the verification reference — keeps that audit short.

Frequently asked questions

How are CIS deductions calculated?

CIS deductions are applied to the labour element of the invoice only — that is, the gross amount minus the cost of materials, plant hire, fuel for plant, and VAT. The applicable rate (0%, 20% or 30%) is then deducted from the labour figure.

What can a subcontractor exclude from the CIS deduction?

Materials directly used on the job, plant hire (where plant is hired in rather than owned), consumable stores, fuel used in plant, and any VAT charged. Travel, subsistence and the subcontractor's own time cannot be excluded.

When does the contractor pay CIS deductions to HMRC?

CIS deductions are paid alongside PAYE — by the 22nd of the month if paying electronically, or the 19th by post. They are reported on the EPS (Employer Payment Summary), not on the CIS300 itself.

What is a payment and deduction statement?

Within 14 days of the end of the tax month, you must give each subcontractor a written PDS showing what they were paid, the materials cost, the labour element and the CIS tax deducted. The subcontractor uses it to reclaim tax against their own bill.

What happens if I deduct CIS at the wrong rate?

If you deduct too little, HMRC can recover the shortfall from you with interest and penalties. If you deduct too much, the subcontractor reclaims it through Self Assessment or, for companies, against PAYE/CIS liabilities — but it damages cashflow and trust.

Get this off your plate

CIS Comply keeps an HMRC-ready audit trail of verifications, monthly returns, and subcontractor payments. Free for up to 3 subcontractors.

  • 12-point due diligence checklist
  • HMRC verification log + GPS alerts
  • Monthly return summary + nil-return tracker

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